US elections: Key issues for Australia

The 2016 US presidential election is taking place in the context of an American economy stuck in neutral.

The labour force has been growing steadily, adding an average of 221,000 jobs per month over the last year.

Wage growth has edged up to 2.6% over the year to July but is still low by historical standards. Further, the share of the population employed remains well below its previous peak and GDP growth continues to disappoint, coming in at an annualised rate of 1.2% in the June quarter. Having raised interest rates from zero in December last year, the US Federal Reserve hasn’t felt sufficient confidence in the broader economy to make a further move so far in 2016.

The state of the economy is often used as a barometer for the performance of the incumbent party in the White House. As the country’s economic performance remains chequered, this could be seen as a boost for the Republicans, putting to one side Donald Trump’s place as a candidate very much outside the Republican mainstream.

US presidential elections are nearly (possibly equally) as important for the rest of the world as they are domestically. The US remains a dominant economy globally – and this means strong US economic growth is important for the rest of world, including for Australia. The US is also our third largest trading partner and largest source of overseas investment. US policy direction can, therefore, have a significant effect on the Australian economy.

When it comes to trade both candidates have espoused more protectionist views than in recent election cycles. Of particular relevance to Australia are the candidates’ views on the Trans Pacific Partnership (TPP) agreement. The still-to-be-implemented trade and investment agreement between the US, Australia and 10 other Pacific nations has generated mixed views among economists, who are generally supportive of the move to lower barriers to trade, though some have been concerned about the IP protections it contains. Both US candidates have come out against the agreement, suggesting that neither would support its passage into force.

Beyond that, Trump has suggested he would declare China a currency manipulator on day one of his presidency, which would see import duties applied to Chinese exports to the United States [1].

How such a move would play out for global trade is unknown, but it is not difficult to imagine an escalation which resulted in tariff and non-tariff barriers increasing around the world. While some sectors would benefit in the short-term from greater protectionism, the move to lower tariffs and freer trade across the world is generally seen as having been significant in supporting Australia’s record run of 25 years without a recession. The potential for trade wars would fly in the face of Australia’s recent achievements of free trade agreements with China, Japan and Korea.

Domestically focused US policies can also impact on the global and Australian economies through their impact on the performance of the US economy.

Both candidates have outlined tax reform proposals. Trump’s plan involves making substantial reductions to the amount of tax paid by individuals and corporations by lowering rates, flattening the tax scales and removing or scaling back deductions and other tax breaks. Independent analysis by the Tax Policy Centre has found that full implementation of the plan would see tax revenues as a share of GDP fall to their lowest level since World War 2 [2]. This would require significant spending cuts to ensure that the US Government’s budget position did not deteriorate further, potentially putting significant pressure on the US budget and the $US if those spending cuts were not forthcoming (or not delivered through Congress).

Hillary Clinton’s tax plan takes an alternative route, centred on increasing the amount of tax paid by high income and wealthy tax payers. This includes the introduction of a “Buffet rule”, which imposes a minimum 30% tax on taxpayers who earn above US$1 million. Unlike Trump’s plan, Clinton’s is expected to make the system more complicated due to the introduction of minimum tax rates and more complex taxation of capital gains. The tax plan is expected to raise a significant amount of revenue which would be used to fund the candidate’s spending promises.

Immigration is another source of contention between the two candidates. Trump has proposed a number of policies aimed at restricting immigration into the United States, including the removal of more than 11 million undocumented immigrants.

Clinton has a considerably more pro-immigration stance, and has endorsed policy that is expected to increase immigration of both low skill and high skill workers. Overall, this policy is expected to increase legal immigration to the US by around one million people per annum [3].

Moody’s analytics has estimated the effect on the US economy of implementing both candidates’ policy platforms in full over ten years – in 2026, the US economy is expected to be 2.7% larger under a Clinton presidency and 6.8% smaller under Trump compared to their baseline forecast.

However, given the significant difference in US population levels which may result under the policies of the two candidates, that economic difference may just reflect the difference in the number of employed persons expected to be seen, rather than differences in per capita incomes.

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.